Question

you are a business owner, who bought 100 cars from Honda Finance (cars that had been returned after the leases ended.) The cost was $500,000, to be paid in 30 days. When the cars arrived, some were in better condition than others. You sold 25 right away, for $10,000 each. Just to be safe, you sent the payments directly to Honda, even though the whole sum was not yet due. The remaining cars were a hard sell but sold for $7500 each, and at the end of the month, you were left with 50 cars and the payment to Honda was due, as well as your rent, salaries, overhead, etc. In desperation, you sell the remaining 50 cars to another lot at a price of $4000 each. The price discount was based upon the purchaser's agreement to pay in cash upon delivery. When the driver returns after delivering the cars, instead of cash he hands you a check from the other dealer........

1. If the check clears, how much did you profit or loss in the transaction?

2. What action would you take now if the purchaser of the cars refused to pay with cash or a certified check, the regular check is the only payment available? What risks have you taken and what can the ramifications be?

Answer 1

1. Cost of 100 cars = $500,000

Sales price of 25 cars at $10,000 each = $250,000

Sales Price of 25 cars at $7500 each = $187500

Sales price of remaining 50 cars at $4000 = $200,000

Total sales value = $637500

If the check clears, profit made in this transaction = $637500- $500,000 = $137500

2. If purchaser fails to meet the purchasers agreement guidelines, legal action needs to be taken for the damages incurred in lieu of delay in the payment to Honda Finance. The discount which has been provided under duress situation shall also need to be realised from the purchaser. Further, a letter to Honda Finance on extending the period of payment shall be forwarded as early as possible.

By selling to the purchaser who failed to meet the agreement following risks have been taken and ramifications have been mentioned along side.

• Credit Risk: Regular check provides uncertainty whether payment will be certain or not. If does not happen, it will result in failure to service the debt.
• Reputation Risk : If the debt is not serviced, the credit score will be downgraded.
• Legal Risk : Chances of being sued becomes higher due to possibility of non-payment which is indeed likely.